The Advisor Institute: Coach's Corner
Equity awards: Compensation in disguise

Practical messages intended to help you elevate the success of your practice.

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      By David GordonDirector, Eaton Vance Advisor Institute

      Equity-based awards — such as stock grants, stock units or stock options — are granted to many employees as part of their total compensation. The name "awards" and the confusing language and rules that accompany them may disguise these awards as something other than compensation.

      Stock plan administrators are likely not providing your prospective and existing clients with proactive, comprehensive advice, as these administrators cannot see your clients' full financial picture. Many advisors we know have stories about clients who have allowed in-the-money options to expire unexercised or who have sold shares in tax-disadvantaged "disqualifying dispositions." Some even tell tales of clients who have refused to accept equity awards they were offered.

      The language of equity awards is completely unlike the language of compensation. Can you speak both? We believe you can help existing and prospective clients understand the risks and opportunities of equity awards with these questions:

      1. Do you own employer stock through an employer-sponsored qualified retirement plan or employee stock purchase plan?
      2. What kinds of equity awards have you received in the past, and what have you done with them?
      3. Can I see your incentive compensation (or equity award) statement?

      Most clients will have trouble answering these questions because they only think about equity awards once a year — when they receive them. The last question is my favorite because even C-suite executives typically need help understanding how their equity awards fit into their total compensation picture.

      If you can develop simple ways to explain how the tax code makes some shares attractive to hold for the long term and others attractive to dispose of more quickly, you'll be well down the road in a conversation about diversification — all without challenging the outlook for the stock itself.

      Bottom line: By providing full balance sheet advice, you can help existing and prospective clients discover compensation in disguise.